Do I need a business bank account for a sole proprietorship?
If you’re asking this question, there’s a good chance you own a small business or you’re looking to establish one.
It’s a good question, though. After all, a sole proprietorship doesn’t provide any legal separation between a business and its owner. In other words, you’re your business. Why should you waste your time opening an account that’s dedicated to your business?
Well, regardless of your personal views, the truth is there are benefits and drawbacks to having a separate bank account for your business.
In this article, we’re delving into both sides of the coin. Keep reading!
The Benefits of Having a Bank Account for Your Sole Proprietorship
Let’s start with the advantages of having a sole proprietorship bank account.
What were your business’s gross revenues last year? What about expenses?
Did you make any profits last year? How much?
If you don’t have answers to all these questions, you probably don’t have a separate bank account for your sole proprietorship. That’s what happens when you mix personal and business finances. You have no idea what belongs to you and what belongs to the business.
When you have a separate bank account for your business, it’s way easier to practice accurate record keeping. You’ll have a clear picture of your business’ finances and, as a result, be in a better position to make informed financial decisions.
For instance, when you have a separate bank account, it’s easy to know if your business is making losses. Consequently, you can resolve to shut down the business instead of incurring more losses without your knowledge.
As a sole proprietorship, you probably don’t have the budget to hire an in-house bookkeeper. Operating a separate bank account ensures you don’t have to hire a bookkeeper since you’ll find it easier to manage the business’ finances on your own.
Gives Your Business a Professional Image
Let’s say your sole proprietorship supplies groceries to schools in your community. After making the deliveries and sending the invoices, your clients ask for your payment information.
You give them bank account details as follows:
John J. Doe
A/C 1234567, ABC Bank.
What impression will your clients get?
While some might understand that your business is likely a sole proprietorship, their perception of your services might change. Organizations want to do business with other organizations. The only time they want to be sending out money to individuals is when they’re paying their employees.
Now picture the following bank details:
J.J Fresh Groceries
A/C 7654321, ABC Bank.
Doesn’t this look more professional?
It’s no secret that having a dedicated business bank account for your business gives your business a professional image, especially if your model requires clients to make payments into your account. A professional image not only improves customer loyalty but also helps you attract others.
Makes Filing Taxes Easier
As a sole proprietor, you still have to report your income (or losses) to Uncle Sam.
On Schedule C, line 1, you have to report your business’ gross receipts or sales for the year.
This effectively means you have to keep accurate track of your business’ sales. If you’re banking your business and personal money into the same account, it’s harder to keep track of your business’ income. As a result, you’re very likely to underreport or overreport your income when filing taxes.
Overreporting your income means you won’t be able to take full advantage of tax deductions. Underreporting your income might raise the IRS’ suspicions, which might result in tax audits and possibly fines. In fact, you might find yourself needing the services of a money laundering defense attorney if you can’t straighten out your taxes.
Lower Risk of Using Business Money for Personal Errands
As a sole entrepreneur, you have personal and business bills to take care of. If your business operates from rented premises, for instance, at the start of every new month you’ll have to pay rent and energy bills. And if you also live in a rented house, you’ll have the same bills.
When you have one bank account, it’s so easy to use business money for personal bills. Especially if your business is profitable and you have a substantial amount of personal debt, you could spend business money to settle your debts without even noticing.
This could be detrimental to your business, as it affects its cash flow.
Drawbacks of Having a Separate Account for Your Sole Proprietorship
Yes, there are drawbacks to having a separate account for your small business! Let’s flesh them out.
The vast majority of sole proprietorships are one-man shows. This means there’s only one person running the various facets of the business.
When you have separate accounts, keeping tabs on them can be time-consuming, especially if you hold your accounts in different banks. If you need to bank two checks, one to your business account and the other to your personal account, imagine the amount of time you’d waster visiting two banks, all while you could be depositing the checks into one account.
Unnecessary Banking Charges
Operating two bank accounts is not cost-effective, considering that you could be using just one account. Between the account maintenance charges, withdrawal fees, and other charges levied by your bank(s), you’ll find that it’s cheaper to keep one account.
Do I Need a Business Bank Account for a Sole Proprietorship? Absolutely!
If you’re still asking, “Do I need a business bank account for a sole proprietorship?” you now have adequate information that you can use to answer it. However, it’s clear your business needs its own account. There are drawbacks, yes, but the benefits win.
Need more small business tips and insights? Keep reading our blog.